Page 37 - Calculating Lost Profits

sess the reliability of the underlying data. Case law suggests that courts consider several issues when
evaluating the admissibility and weight of an expert’s testimony that relies on client-supplied data, in-
cluding

 the qualifications of client personnel supplying information,

 expert acceptance of client data, with and without testing,

 the reliability of projections provided by the client,

 the reliability and reasonableness of assumptions used to develop client projections, and

 the context within which the projections were prepared and the motives of the personnel prepar-
ing the projections.

For a more complete discussion of the case law pertaining to the use of client-supplied information, see
chapter 2, "Client-Supplied Information," in the practice aid Attaining Reasonable Certainty in Econom-
ic Damages Calculations.

Using the American Kitchen example, if the practitioner received forecasts or projections for the 11th
location, questions the practitioner may want to consider include the following:

 Who prepared the forecasts and projections? Was the preparer experienced in developing these
types of materials?

 Were these projections created in the normal course or for purposes of the dispute?

 Have previous projections been met?

 Do management’s projections deviate from the business’s historical experience? Why?

 Do management’s projections reflect a different trend or outlook for the company than is gener-
ally anticipated for the market or industry?

Determine the Applicable Method and Estimate But-For Revenues

Establishing lost revenues is often the most challenging element of determining lost profits, in large part,
because the but-for world is counterfactual (it did not occur) and, therefore, not exactly knowable. The
typical methods of estimating but-for revenues include

 the "before-and-after" method,

 the "yardstick" (or "benchmark") method,

 an approach based on the terms of an underlying contract, and

 other methods, depending on the facts and circumstances of the matter.

Additional factors may need to be considered when estimating the lost profits in a newly established
business or one without a history of revenues relevant to the case and business in question. A brief dis-

© 2020 Association of International Certified Professional Accountants 35